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MISSION:INTANGIBLE, the blog of the Intangible Asset Finance Society, offers critical comments on intangible asset, corporate reputation, and finance; supplemented by quantitative reputation metrics. Intangible assets include business processes, patents, trademarks; reputations for ethics and integrity; quality, safety, sustainability, security, and resilience; and comprise 70% of the average company's value. MISSION:INTANGIBLE is a registered trademark of the Intangible Asset Finance Society.

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SAP AG: Blind to intangible risks

C. HUYGENS - Wednesday, December 01, 2010
SAP is the dominant solution provider in the $8 billion enterprise management and business intelligence software sector. The company's products provide businesses with an integrated view of their operations for cost and asset value optimization, and predictive analytics to help identify opportunities and risks. But their software doesn't manage intangible assets, and the risk their software didn't help them see was a breach of ethics and intellectual property management best practices by a partner company that they subsequently acquired.

Cutting to the chase, Oracle (NASDAQ:ORCL) last week won a $1.3 billion jury verdict against rival SAP (NYSE:SAP), netting the biggest copyright-infringement award ever. According to Bloomberg News, the jury delivered the verdict Tuesday, after an 11-day trial in federal court in Oakland. The lawsuit started in 2007, with Oracle claiming the German company's TomorrowNow business made hundreds of thousands of illegal downloads and several thousand copies of Oracle's software as part of a plan to steal customers.

SAP acquired the TomorrowNow in 2005 and closed it in 2008. SAP had hoped to use the unit to lure thousands of customers of PeopleSoft and JD Edwards, which Oracle had acquired, to purchase SAP software, according to evidence presented at trial. The unit garnered 358 customers.

The award was more than analysts had estimated - and far beyond the $160 million that SAP had set aside for the litigation.The immediate equity costs -- SAP is underperforming the mean of its 217 peers in the Systems and Subsystems sector by 7.71% -- are therefore understandable. What about the long-term reputation effects?

One week out from the verdict,  the signals are mixed. Over the trailing twelve months, The Steel City Re Corporate Reputation Index has risen from the 92nd to the 96th percentile. The Exponentially Weighted Moving Average of the volatility of the Index, which had been falling for most of the past six months, has been rising over the past few weeks to .4%. This is a negligible amount. On the other hand,  the trailing twelve week Index velocity is negative and the vector is negative, and these are worrying signs. The intangible asset fraction is unchanged at around 93% beating the sector mean of around 80%.

If the stakeholder community looks at SAP and concludes that they are really a good company that had a rogue unit, then they will come through this period with a loss equal to the cash costs of litigation. If the stakeholders view SAP as a behemoth that may harbor other TomorrowNow-like risks, then there will be significant long-term costs.

Hewlett-Packard: Silicon Valley smackdown

C. HUYGENS - Friday, October 08, 2010
The most recent “gotcha last, no tagbacks” comes from the Hewlett-Packard (NYSE:HPQ) team who named former SAP boss Leo Apotheker as its new chief executive 30 Sep.

Team HPQ sued its rival, team Oracle (NASDAQ:ORCL) recently when the latter hired briefly-disgraced HPQ CEO Mark Hurd. The grounds: misappropriation of trade secrets. ORCL is now enraged. This is why. Not only did HPQ just name Ray Lane, former Oracle president and COO, as nonexecutive chairman of HP's board, it turns out that Mr. Apotheker had been in charge of SAP (NYSE:SAP) at a time when it was stealing Oracle’s software. The case of ORCL v SAP is scheduled for trial soon.

On the basis of reputation and financial metrics, Oracle is winning this spat. A side by side comparison of metrics from the Steel City Re Corporate Reputation Index, with a customized peer group comprising relevant hardware and software companies totalling 132 in all, shows that HPQ’s reputation ranking (on the left) has slid over the trailing twelve months 27 points from the 97th percentile to the 70th percentile, while ORCL’s (on the right) has slid only 18 points from the 84th to the 66th.

While the former’s slide has been chronic and steady -- the most recent six months shown in the second set of graphs -- the bulk of ORCL’s reputation change has occurred only amidst the sturm und drang of the past few weeks. Hence HPQ is underperforming this peer group by a respectable 18% (yellow line, top graph, left)while the now volatile ORCL is currently outperforming this peer group by 21% (yellow line, top graph, right).

Oracle: Larry's premonition.

Nir Kossovsky - Friday, September 10, 2010
There is little to add to the Silicon Valley soap opera that hasn’t been posted somewhere else recently. Here is a summary  of the more relevant facts relating to Oracle (NASDAQ:ORCL) and Hewlett Packard (NYSE:HPQ).

1. After a quarter century of working together closely, Oracle started competing with HP by selling computer servers with Oracle's $7.4 billion purchase of Sun Microsystems last year.

2. HP sued Hurd in a California court on Tuesday, a day after he joined Oracle. HP argues that Hurd won't be able to do his job at Oracle without spilling HP's trade secrets.

There is no shortage of colorful figures. At the top, though is Oracle CEO Larry Ellison, who recently shared his opinion of the HP board with this memorable letter sent to the New York Times 

The H-P Board just made the worst personnel decision since the idiots on the Apple board fired Steve Jobs many years ago. That decision nearly destroyed Apple and would have if Steve hadn’t come back and saved them. H-P had a long list of failed CEOs until they hired Mark who has spent the last five years doing a brilliant job reviving H-P to its former greatness. In losing Mark Hurd, the H-P board failed to act in the best interest of H-P’s employees, shareholders, customers and partners.

Mistakes are in the eye of the beholder, and in business, the overall impression is called “reputation.” We turn to the reputation metrics, courtesy of Steel City Re.

One month out from when HP dismissed Mr. Hurd, HP’s reputation metrics are sliding, and enterprise value is disappearing. After riding steadily at the 95th percentile in the Reputation Index ranking of its peer group, Computer Processing Hardware, HP is now in the 84th percentile. The exponentially weighted moving average volatility is climbing and both the trailing twelve week vector and velocity are materially negative. Not surprisingly, the company is underperforming its peers by 28%.

Oracle's reputation is not unblemished either. Rather than an uptick, Hurd’s arrival was associated with a material drop in the Reputation Index ranking and an uptick in volatility. But the equity markets appear to be tolerating the move, at least in the short term, with Oracle currently outperforming the median of its 110-member Packaged Software peer group by 2.4%. So Oracle is winning the reputation derby -- so far. But this is a soap opera, so stay tuned.

Apple: What stakeholders want

Nir Kossovsky - Wednesday, March 10, 2010
Stakeholders own a company’s reputation, and their behaviors are outward expressions of their true feelings.

The behaviors that are relevant to this Society are those that create enterprise value. Among them are acceptance of higher price points, extension of superior credit and labor terms, lower operating friction, higher earnings multiples, and lower credit costs. For readers of this blog or the recently published book, Mission: Intangible, this is old news.

More to the point, in Mission: Intangible, we noted that mutual funds comprising companies with reputations for advancing social values tended to underperform their benchmarks. Among the six major intangible assets that underpin reputation (ethics, innovation, quality, safety, sustainability and security), only excellence in sustainability seemed not to correlate with superior economic performance.

So from time to time, we revisit the issue of the value of green. The triggers for our current revisit are three:

First, a blog note from a friend of the Society, author, and marketing consultant Jon Baskin in which he noted that shareholders at Apple (NASDAQ:AAPL)  recently defeated a new corporate social responsibility initiative.

Second, is the growing movement to create a third class of corporate structure – the “beneficial corporation.” Vermont currently leads this movement with legislation that would allow companies to both (a) return gains to investors and (b) provide social good for the community. The law would give “for profit” companies legal cover to pursue societal goals that may yield less profit. The Vermont initiative is driven by the remorse of socially-conscious shareholders who supported Ben & Jerry’s acceptance of Unilever NV’s (NYSE:UN) buyout offer under threat of litigation from financially-motivated shareholders.

Third is an advertisement of comparative derision that caught our eye in the Wall Street Journal. In the ad run by Oracle (NASDAQ:ORCL), they contrast the following under the headline of “IQ Test”: (their) Sun SPARC computer that run 7x faster versus IBM’s (NYSE:IBM) fastest computer that consumes 6x energy. They ask the consumer tongue in cheek to choose: Faster Computers or Smarter Planets.

We believe that the question of being green or being profitable is a false choice. At the same time, it is self evident that the transfer of corporate profits into social benefits both within and outside the company will at some point reduce cash flows available to shareholders. We will continue to observe and share what we see.

Heads Up - Date Change

The Mission: Intangible Monthly Briefing for April 2010 will be held one week later than usual in deference to those who celebrate Good Friday. On 9 April 2010 at 12h00 EDT, the second Friday of the month, we will host a conversation featuring incoming Integrity and Corporate Responsibility Committee Chairman Paul Liebman from Dell  (NASDAQ:DELL) and IA Value Signaling Committee Chairman Jon Low from Predictiv. The title for the one hour moderated discussion is: Ethics - A valuable intangible asset? Mary Adams from Intellectual Capital Advisors hosts.

As always, registration for this popular series is complimentary and slides will be available for download in advance of the event. To register now, click here.

Join Us

If the above intrigues you or challenges you to learn more, look no further. The Intangible Asset Finance Society wants to be your business resource. Join us and be part of an organization that provides a wealth of educational materials, including a new book, to further your executive career, and exciting monthly conferences such as the upcoming one on ethics mentioned above.

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